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Quantifying Federal Reserve credibility

Stephen Hall and George Tavlas
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Stephen Hall: Department of Economics, Leicester University, Bank of Greece, and University of Pretoria

No 340, Working Papers from Bank of Greece

Abstract: We derive an index that quantifies the Federal Reserve’s credibility from 1965 until 2024. The credibility measure is derived by using the Kalman filter to extract an unobserved component from data, the movements of which are affected by central-bank credibility. We extend previous work using the Kalman filter in that we standardize the variables thought to affect credibility so that they have zero mean and unit variance. Consequently, there is no need to estimate parameters in the Kalman filter measurement equations. The credibility index is used to identify seven historical episodes during which the degree of credibility differed.

Keywords: central bank credibility; Federal Reserve; Kalman filter; unobserved component (search for similar items in EconPapers)
JEL-codes: C32 E52 E58 (search for similar items in EconPapers)
Pages: 26
Date: 2025-04
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